Cross-border tax non-compliance is a vexing problem for national governments. To combat this issue, many countries have tax treaties in place to exchange information on companies or individuals suspected of tax evasion. These treaties have proven ineffective, as the information is only shared upon request. As a result, two approaches have emerged over the past five years to try to eliminate cross-border tax avoidance.

Common Reporting Standard (CRS)

The newest approach has been a collaboration between the Organization for Economic Cooperation and Development (OECD) and the EU, with the endorsement of the G20, whereby all the relevant information regarding an account is automatically exchanged. This system is known as the Common Reporting Standard (CRS) under which financial institutions must determine each customer’s tax residence. If the customer is a tax resident outside the country where the account is held, the financial institution may need to give the national tax authority this information, along with information relating to accounts that will then be shared between the different countries’ tax authorities. As of April 2016, 100 governments had indicated their commitment and support for the Common Reporting Standard, with implementation starting in January 2017 for some countries. Upon implementation, each country will annually automatically exchange with the other country, the

name, address, tax identification number, and date and place of birth of each reportable person;

account number;

name and identifying number of the reporting financial institution, and

the account balance as of the end of the relevant calendar year, or closure date if before year-end.

Participating countries will determine what accounts are reportable. The financial accounts information will be exchanged only between the countries for which the Common Reporting Standard is in effect. Therefore, if a jurisdiction chooses not to participate in the Common Reporting Standard, this jurisdiction will neither automatically report the account information, nor automatically receive the account information from the jurisdictions that have signed the convention.

Whitepaper: Everything you need to know about CRS…but were afraid to ask (download PDF)

Foreign Account Tax Compliance Act (FATCA)

The U.S. was the first country to serio.ly tackle cross-border tax avoidance concerning its own citizens when Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010. This came on the heels of large fines levied on UBS and other Swiss banks for knowingly sheltering bank accounts from U.S. tax for U.S. citizens who either lived in the U.S. or abroad. Under U.S. reporting requirements, accounts held by U.S. citizens and U.S. persons for tax purposes in another country’s jurisdiction are required to be reported via FATCA. The U.S. tax reporting requirements of foreign financial institutions (FFIs) have been significantly tightened under FATCA; FFIs are now required to follow the same reporting rules as U.S. financial service providers when it comes to providing data on customers who are U.S. citizens or residents. Many FFIs rejected complying with FATCA implementation, as they believed that handing over data on their customers would not comply with their own countries’ laws, and because the increased cost of compliance was too burdensome. Independent of FFI compliance with FATCA, the US government has signed intergovernmental agreements on FATCA compliance with more than 100 countries. This development has enabled foreign governments to implement FATCA requirements into their legal systems, which in turn has allowed them to change their privacy and discrimination laws to allow the identification and reporting of U.S. persons.

What are the differences?

Both FATCA and the Common Reporting Standard impose strict penalties for non-compliance on FFIs and FFI directors. Both have similar reporting requirements, including: name, address, tax identification number, account number, name and identifying number of FFI, account balance, and income and sales proceeds. However, the Common Reporting Standard requires the tax residency and date and place of birth for all account holders to be reported. In addition, it does not contain any minimum thresholds, as allowed under FATCA, meaning financial institutions will be required to report significantly higher volumes of information and likely incur higher compliance costs. Finally, although the U.S. is a member of the G20, it has not agreed to adopt the Common Reporting Standard, which may result in funds being invested into the U.S. because the reporting regime is more favorable.

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